Two Thirds of Oil Price Seen at Risk as China Lockdowns Hit; IEA Downgrades (2)

By Mathew Carr

March 28-29, 2022

Brent price drops 8% to $111 a barrel on ICE at 6am in London on March 29. Dec. 2025 contract steady at $77.

From the March IEA report:

The crude market is supported by supply limits overseen by OPEC (plus Russia).

Yet, that OPEC arrangement can only go so far. Should demand fall quickly, and it might, OPEC squabbling might prevent a quick reaction on the supply side.

Record backwardation in oil might not be backward enough.

This chart below shows you whose assets are “strandest” (my new word), as countries introduce carbon pricing, says Nick Gogerty, managing director of Carbon Finance Labs, a unit of oil company Occidental.

Gogerty: “Interesting thing is that as oil demand and prices decline, the lowest carbon producers will have advantages.  Remember, in the absence of any other information, the best proxy for carbon is cost. i.e. for oil the cost of lifting oil. So tar sands fails fast. Many of the Gulf states have extremely low (relative lifting costs). So OPEC as a share of a shrinking pie may grow, but the world will care less and less.  

“The risks are that as demand shrinks, power shrinks, and ‘pricing’ power may be maintained by destabilising others, as cartel behaviours won’t work.

“That is, you can  ‘cartel’ all you want but if everyone needs $65 to survive economically and you can only ‘cartel’ $40 at some point it becomes survivor island.”

Gogerty sees 2025 oil prices around $25, but that could be messed up by inflation.

See his analysis from about a month ago:

“My estimates from 2018 were that EVs would shrink oil demand 2.5-3m bpd by 2025, equating to $25/bbl in 2025 with  shifting calculus from price stability to pump fast as the mbpd destruction would increase exponentially with 8-10 mbpd by 2030. 

“Note that the price wipes out $50 trillion in proven reservers globally from petro states. 

“Most petro states finances go negative with oil below $65. (See Fitch/moody’s etc.)”

Gogerty’s 2018 estimate was more aggressive than most. 

“Fast forward 4 years and my figures for 2025 demand destruction are now more aggressive as I purposely left out EV and related policy pressures in 2018. Even the pandemic didn’t slow EV demand curves doubling in 2021.  Wait time for average EV is now 6 months (all models). 

“Russia’s power is from 3 sources. Nuclear threat blackmail, weapons exports and energy exports.  With declining demand, interrupting supply is a logical move using force.  This may or may not be part of the calculus today. But my analysis is that shifting geopolitics will be driven by shifts in energy policy, retreating US in gulf etc. 

“This will sound silly as oil could rocket in the coming weeks (Author note: it did). Long term EVs and cheap long term storage like the carbon company Antora  will wipe out demand for natgas and oil by 25-35% in 7 years. 

“$10 oil is possible in 2030.”

“Russia’s aluminium etc. exports will face strict buy-clean pressures as will China as debates about climate get wrapped up in macro and idealogical policy. See any map of russia’s grid v. developed world.”

Gogerty bases his opinion on oil demand destruction due to technology, but he says he’s less familiar with the policy side.

“How the forces around the economic oil demand vacuum plays out is anyones guess. Also don’t know when the lightbulb goes on for various groups driving responses.”

The desert nations of Egypt, Saudi Arabia, Israel and Jordan by NASA Johnson is licensed under CC-BY-NC-ND 2.0

(Adds IEA snip from earlier in the month, smooths language, punctuation, updates oil price to Tuesday morning London time)

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